Infrastructure alone won’t spring Thailand from middle-income trap

The Association of Southeast Asian Nations’ top six spenders on infrastructure will invest a total US$84 billion (Bt2.9 trillion) this year on public projects, according to Maybank Kim Eng.

Indonesia will spend the biggest sum, $23 billion, says the investment bank’s report, “Asean Infrastructure: The New Old Thing”. Next comes Vietnam at $20 billion, the Philippines ($15 billion), Singapore ($14 billion) and Malaysia ($9 billion). Notably, Singapore has announced it will boost development expenditure to 6 per cent of gross domestic product by 2020.

Meanwhile Thailand is set to spend $3 billion this year, before rising to an average $9 billion a year until 2020.

The amounts sound huge but the goals are justifiable. Amid concern from development agencies at the state of the global economy, government-led investment is vital in keeping economies afloat. With poor export demand expected to persist, only governments have room to inject money into the economies. And this time it seems they have wised up to the fact that infrastructure projects should be geared towards boosting countries’ competitiveness in the long term.

The focus in Malaysia is the build-out of the rail system over the next 5-10 years, to improve local and regional connectivity after the launch of the Asean Economic Community last December.

Singapore continues is pouring in money to bolster its status as regional hub for gas trading and for information and communications.

The priority in the other four countries is increasing the infrastructure capital stock – the cumulative investment in infrastructure.

World Bank data shows Thailand ranks third in Asean for infrastructure capital stock, with about $10,000 per capita in 2013. But that’s way lower than Malaysia’s $20,000-plus and Singapore’s $30,000.

In terms of quality of infrastructure, Thailand ranked 71st out of 140 countries in the World Economic Forum’s competitiveness report for 2015-2016. Neighbours Singapore and Malaysia ranked 4th and 16th, respectively.

Elsewhere, the Philippines has paid the price for under-investment in recent years as its logistics performance has declined compared to its regional neighbours. Investment in transport is expected to be a key focus of the new government after the country’s May 9 elections.

For Thailand, logistics cost is under scrutiny. Maybank is convinced that Bangkok’s Bt1.8-billion infrastructure plan will lower logistics costs as a percentage of GDP from 14 per cent to 12 per cent. The ratio remains high compared to the 8.3 per cent in the United States, but a fall in Thailand will be a boon for manufacturing, which remains a key driver of growth and features a high proportion of low-margin businesses. The sector accounts for 84 per cent of GDP, and about 96 per cent of its output is moved by land. The 2-percentage-point decline could thus save Bt260 billion per year in logistics costs.

The investment is vital for the long-term competitiveness necessary for Thailand to escape the middle-income trap, notes economist Manop Udomkerdmongkol in a study for UOB. He adds that the infrastructure projects should eventually make Thailand the logistics hub of mainland Southeast Asia.

Nevertheless, the government needs to brace for side-effects.

At the macro level, better transport infrastructure will improve Thailand’s competitiveness and benefit important sectors like energy, technology and logistics. Public projects, as well as the private-sector investment that will follow, will drive the economy and have long-lasting effects. The Bangkok rapid mass-transit systems will increase demand for electricity, while air- and water-transport projects will boost demand for fuel. As rail connectivity brings urbanisation, workers will move out of agriculture and into higher-income service businesses. The result could be worsening farm-labour shortages.

With over Bt2 trillion in domestic liquidity, Thailand should have no difficulty financing the investment. Yet Maybank foresees several physical limitations to construction work – including materials, manpower, seasonal weather and the availability of good-sized civil contractors. Delays are likely, it said, citing cases such as legal troubles over construction of Suvarnabhumi Airport and its rail link, plus compensation claims that were stuck with the courts for over a decade.

Meanwhile, the Thai package involves 2,647 kilometres of road to be completed within five years. The 20-per-cent extension to today’s road network is liable to cause traffic disruptions and thus put back the completion date.

The Thai government should also be aware that physical infrastructure development is only one among several conditions necessary for success, Manop of UOB noted.

“Long-term improvements in Thailand’s economic wellbeing also require drastic ‘social infrastructure’ measures – including but not limited to educational reforms, legal improvements (especially with regard to property rights and regulatory burdens for businesses), as well as improvements to government efficiency and good governance. These policies for an all-round upgrade will ensure Thailand has a safe, undisrupted trip on the road to prosperity over the years to come.”